Strategic Management of Technological Innovation Melissa Schilling Chapter 6 DEFINING THE ORGANIZATION’S STRATEGIC DIRECTION

Genzyme’s Focus on “Orphan Drugs” Genzyme was founded in 1981 by scientists studying genetically inherited enzyme diseases Adopted a very unusual strategy of developing drugs for rare diseases rather than “blockbuster” drugs. Developing a drug takes 10-14 years at an average cost of $800 million to perform the research, run the clinical trials, get FDA approval and bring the drug to market Blockbuster drugs earn revenues of $1 billion or more and are sold to millions of people with chronic illnesses Genzyme concentrated on the “orphan drug” market that had a market of only a few thousand people Requires smaller clinical trials, less advertising, smaller sales force, less competition Insurance companies would be willing to cover the drugs due to the severity of the diseases and a limited number of patients for the drug Organization’s Strategic Direction

Genzyme’s Focus on “Orphan Drugs” In 1983, the FDA established the “Orphan Drug Act,” giving seven years market exclusivity to developers of drugs for rare (<200,000 patients) diseases. Also chose unusual strategy of doing its own manufacturing and sales rather than licensing to a large pharmaceutical company. Diversified into side businesses to fund its R&D Chemical supplies Genetic counseling Diagnostic testing The company went public in 1986, raising $27 million Their first drug, Cerezyme, was sold to 4,500 patients at a yearly cost of $170,000 (annual revenue of $800 million). The drug is required to be taken for the lifetime of the patient. By 2006, Genzyme was the world’s third largest biotech company proving that a profitable business could be built around small disease populations Organization’s Strategic Direction

Overview A coherent technological innovation strategy leverages the firm’s existing competitive position and provides direction for future development of the firm. Formulating this strategy requires: Appraising the firm’s environment, Appraising the firm’s strengths, weaknesses, competitive advantages, and core competencies Articulating an ambitious strategic intent. Determining the key resources and capabilities the firm needs to develop or acquire to meet its long-term objectives Organization’s Strategic Direction

Assessing the Firm’s Current Position External Analysis Two common methods are Porter’s Five-Force Model and Stakeholder Analysis. Porter’s Five-Force Model Has been used to analyze whether a particular industry as a whole will be profitable or to determine an individual firm’s chances for success via a vis its competitors Discount retail industry as a whole is very competitive and thus unattractive for new entrants but an individual entrant such as Wal-Mart could be profitable because of its scale, use of advanced technology, location strategies, etc. Degree of existing rivalry. Determined by number of firms, relative size, degree of differentiation between firms, demand conditions, exit barriers (for firm to leave the market) Threat of potential entrants. Determined by attractiveness of industry, height of entry barriers (e.g., start-up costs, brand loyalty, regulation, etc.) Bargaining power of suppliers. Determined by number of suppliers and their degree of differentiation, the portion of a firm’s inputs obtained from a particular supplier, the portion of a supplier’s sales sold to a particular firm, switching costs, and potential for backward vertical integration - firm produce its own supplies Organization’s Strategic Direction

Assessing the Firm’s Current Position Bargaining power of buyers. Determined by number of buyers, the firm’s degree of differentiation, the portion of a firm’s inputs sold to a particular buyer, the portion of a buyer’s purchases bought from a particular firm, switching costs, and potential for forward vertical integration - supplier enters firm’s business Threat of substitutes. Determined by number of potential substitutes, their closeness in function and relative price. Substitutes are not competitive products but can fulfill a strategically equivalent role for the customer Other coffeehouses are competitors to Starbucks but bars, restaurants, beer, soft drinks are substitutes Buses are substitutes for airlines Organization’s Strategic Direction

Assessing the Firm’s Current Position Recently Porter has acknowledged the role of complements. The availability, quality and price of complements will influence the threats and opportunities posed by the industry Must consider: how important complements are in the industry, whether complements are differentially available for the products of various rivals (impacting the attractiveness of their goods), and who captures the value offered by the complements. The ink cartridge market is extremely profitable to desktop printer manufacturers and thus the cartridge of one company is incompatible with the printer of another company The market is so profitable that third-party vendors produce clones or refill the empty cartridge with ink Organization’s Strategic Direction 6-7

Assessing the Firm’s Current Position Five-Force Model

Assessing the Firm’s Current Position Stakeholder Analysis Who are the stakeholders? What does each stakeholder want? What resources do they contribute to the organization? What claims are they likely to make on the organization?

Assessing the Firm’s Current Position Internal Analysis Identify the firm’s strengths and weaknesses. In Porter’s model of a value chain, activities are divided into primary activities and support activities Primary activities are those directly related to the product or service provided by the firm Support activities are those indirectly related to the main business of the firm Each activity can then be considered from the view of how it contributes to the overall value produced by the firm and what the firm’s strengths and weaknesses are in that activity

Assessing the Firm’s Current Position 6-11

Value-Chain Analysis for Take2 Interactive Software Produces Grand Theft Auto video game R&D is considered a primary activity, but the support activity of the technology development is not considered Because all the game manufacturing is performed by the console producers rather than by Take2, its primary technology activities center on design and games which is part of R&D

Value-Chain Analysis for Take2 Interactive Software

Value-Chain Analysis for Take2 Interactive Software

Assessing the Firm’s Current Position Once the key strengths and weaknesses are identified, the firm can assess which strengths have potential to be a source of sustainable competitive advantage to implement its strategic intent for the future To be a source of sustainable competitive advantage, resources must be Rare, Valuable, Durable and Inimitable Rare and valuable resources may yield a competitive advantage, but that advantage will not be sustainable if the firm is incapable of keeping the resources or if other firms can imitate them A positive brand image can be a rare and valuable resource, but it requires ongoing investment to sustain it or else it will erode Technological advances are reverse-engineered, skillful marketing campaigns are copied, innovative HR practices copied, etc. Organization’s Strategic Direction

Assessing the Firm’s Current Position Resources are difficult (or impossible) to imitate when they are: Tacit – resources of an intangible nature, such as knowledge, that can not be readily codified in written form Path dependent – dependent on a particular historical sequence of events Socially complex – they arise through the interaction of multiple people Causally ambiguous – the relationship between a resource and the outcome it produces is poorly understood Talent is considered to be a tacit and causally ambiguous resource; an inherent trait that can not be trained and the methods by which individuals acquire it or tap into it is poorly understood A first-mover advantage is a path-dependent advantage that can not be copied; only one firm can be first Organization’s Strategic Direction 6-16

Identifying Core Competencies and Capabilities Once a baseline internal analysis has been established, a firm can move on to identifying its core competencies and formulate its strategic intent Core Competencies: A set of integrated and harmonized abilities that distinguish the firm in the marketplace. Competencies typically combine multiple kinds of abilities e.g., Managing the market interface Building and managing an effective infrastructure Technological abilities Several core competencies may underlie a business unit and several business units may draw from same competency. The organization’s structure and incentives must encourage cooperation and exchange of resources across strategic business unit boundaries Core competencies should: Be a significant source of competitive differentiation Cover a range of businesses Be hard for competitors to imitate Sony’s core competency is miniaturization which arises from harmonizing multiple technologies (liquid crystal displays, semiconductors, etc.) and is leveraged into multiple markets (TVs, radios, PDAs, etc.) Organization’s Strategic Direction

Identifying Core Competencies and Capabilities Prahalad & Hamel compare competencies to roots from which grow core products such as major components or subassemblies Core products, in turn give rise to business units, whose fruits are the various end products of the company Individuals in the corporation should be viewed as corporate assets that can be redeployed across the organization and not wed to a particular business unit Organization’s Strategic Direction

Identifying Core Competencies and Capabilities Prahalad & Hamel offer the following tests to identify the firm’s core competencies Is it a significant source of competitive differentiation? Does it provide a unique signature to the organization? Does it make a significant contribution to the value a customer perceives in the end product? For example, Sony’s skills in miniaturization have an immediate impact on the utility customers reap from its portable products. Does it transcend a single business? Does it cover a range of businesses, both current and new? For example, Honda’s core competence in engines enables the company to be successful in businesses as diverse as automobiles, motorcycles, lawn mowers, and generators. Is it hard for competitors to imitate? In general, competencies that arise from the complex harmonization of multiple technologies will be difficult to imitate. The competence may have taken years (or decades) to build. This combination of resources and embedded skills will be difficult for other firms to acquire or duplicate. According to Prahalad and Hamel, few firms are likely to be leaders in more than five or six core competencies. If a company has compiled a list of 20 to 30 capabilities, it probably has not yet identified its true core competencies. By viewing the business as a portfolio of core competencies, managers are better able to focus on value creation and meaningful new business development, rather than cost cutting or opportunistic expansion Organization’s Strategic Direction

Research Brief – Identifying the Firm’s Core Competencies Gallon, Stillman and Coates offer a step-by-step program for identifying core competencies. Module 1 -- Assemble a steering committee, appoint a program manager, and communicate the overall goals of the project to all members of the firm. An exhaustive inventory of capabilities should be compiled. Module 2 -- Constructing an inventory of capabilities categorized by type. Assess their strength, importance, and criticality. Module 3 – Organize capabilities by both their criticality and the current level of expertise within the firm for each. Module 4 – Distill competencies into possible candidates for the firm to focus on. No options should be thrown out yet. Module 5 -- Testing the candidate core competencies against Prahalad and Hamel's original criteria. Module 6 -- Evaluate the firm’s position in the core competency vis a vis the competition. The firm can now identify any areas in which it needs to develop or acquire missing pieces of a particular competency. Organization’s Strategic Direction

Risk of Core Rigidities When firms excel at an activity, they can become over committed to it and rigid. Incentives and culture may reward current competencies while thwarting development of new competencies. Dynamic capabilities are competencies that enable the firm to quickly respond to change, emerging markets and major technological discontinuities e.g., firm may develop a set of abilities that enable it to rapidly deploy new product development teams for a new opportunity; firm may develop competency in working with alliance partners to gain needed resources quickly. Corning has made its own evolvability one of its most important core competencies Invests heavily in research areas likely to provide scientific breakthroughs Develops pilot plants to experiment with new products and production processes Manages its relationships with alliance partners as an integrative and flexible system of capabilities that extend the firms boundaries not as individual relationships focused on particular projects Organization’s Strategic Direction

Strategic Intent Strategic Intent A firm’s purpose is to create value not just by cutting costs or improving operations but by developing new businesses and markets and leveraging corporate resources Strategic intent is a long-term goal that is ambitious, builds upon and stretches firm’s core competencies, and draws from all levels of the organization. Canon’s obsession with overtaking Xerox, Apple’s mission of ensuring that everyone has a personal computer and Yahoo’s goal of becoming the world’s largest Internet shopping mall (Hamel & Prahalad) Typically looks 10-20 years ahead, establishes clear milestones for employees to target Without it, firms follow their customers instead of leading them Firm should identify resources and capabilities needed to close gap between strategic intent and current position.

The Balanced Scorecard Kaplan and Norton point out that a firm’s methods of measuring performance will strongly influence whether and how the firm pursues its strategic objectives They argue that effective performance measurement is more than just reliance on financial indicators. It should incorporate: Financial perspective Goals: meet shareholder’s expectations, double corporate value in 7 years Measures: return on capital, net cash flow, earnings growth Customer perspective Goals: improve customer loyalty, offer best-in-class customer service Measures: market share, percent of repeat purchases, customer satisfaction surveys

Theory In Action Internal perspective Goals: reduce internal safety incidents, build best-in-class franchise teams, improve inventory management Measures: number of safety incidents per month, franchise quality rating, inventory costs Innovation and learning perspective Goals: accelerate and improve new product development, improve employee skills Measures: percentage of sales from products developed within the past 5 years, average length of the new product development cycle, employee training targets The scorecard may have to be adapted to fit different markets and businesses, but a 2002 survey found that approximately 50% of Fortune 1,000 companies in the US and 40% in Europe use some version of the balanced scorecard

Theory In Action